Thursday, December 11, 2008

The Congressional Oversight Panel (COP) established under the Emergency Economic Stabilization Act of 2008 (EESA) to “review the current state of the financial markets and the regulatory system” released the first in a series of reports yesterday. The report, “Questions About The $700 Billion Emergency Economic Stabilization Funds,” raises 10 issues about Treasury’s Troubled Asset Relief Program (TARP) and the various programs thereunder including the Capital Purchase Program and the Significant Failing Institutions (SSFI) program. Here are the Ten Questions from COP:

What is Treasury’s Strategy?

Is the Strategy Working to Stabilize Markets?

Is the Strategy Helping to Reduce Foreclosures

What Have Financial Institutions Done with the Taxpayers’ Money Received So Far?

Is the Public Receiving a Fair Deal?

What is Treasury Doing to Help the American Family?

Is Treasury Imposing Reforms on Financial Institutions that are taking Taxpayer Money?

The COP on the beat has not been without controversy itself, since one of its original appointees from the minority party bowed out of consideration, and the other minority member, Rep. Jeb Hensarlingtestified separately yesterday that he withheld signing off on this first COP report. His objection, he explained, was due in part to some procedural concerns about the panel, and concern about certain language which he believed “could be interpreted as a panel expectation that Treasury should make credit more expensive and less available for Americans.” He noted his concern that such a recommendation “could delay the recovery of our housing market at exactly the wrong time in our nation’s economic history.”

Also testifying at yesterday’s House Financial Services Committee hearing, chaired by Rep. Barney Frank, were Gene Dodaro, Acting Comptroller General, U.S. General Accountability Office, on GAO’s own oversight report on the TARP program, (see GAO testimony and GAO report), and Neel Kashkari, Interim Assistant Secretary for Financial Stability and Assistant Secretary for International Affairs at the U.S. Treasury Department, in charge of overseeing Treasury’s efforts on TARP on behalf of Treasury Secretary Henry Paulson.

Feedback Sought Through Roundtables, WebsiteAs noted in COP’s report, the panel intends to issue another report within 30 days (on Jan. 10) which will endeavor to provide answers to questions such as those raised above regarding TARP. They will accomplish their mission by continuing to interview representatives of the Treasury Department and other officials, and by holding a series of field hearings -the first of which is set to take place next week in Las Vegas, Nevada. Not only is Nevada home to Senate Majority Leader Harry Reid, but the metaphor of gambling will no doubt not be lost on attendees. In fact, FASB Chairman Robert Herz spoke of institutions who were willing to ‘bet the ranch’ in his keynote address at an AICPA conference earlier this week.

COP has also established a website, which can be found at http://www.cop.senate.gov/. The panel notes it intends to use the website not only to post information, but to facilitate public comment and feedback.

Roadmap to Regulatory ReformAs also directed by Congress in Section 125 of EESA, COP has also been charged with issuing a special report to examine the financial regulatory system, and make related recommendations for reform. COP states it will release that report on January 20 (coincidentally, Inauguration Day). “This report will provide a roadmap for a regulatory system that would revitalize Wall Street, protect consumers, and ensure financial stability in our markets,” says the panel.

Recent speeches emanating from the SEC and FASB have cautioned all those considering regulatory reform to consider the separate roles of the SEC (as the investors’ advocate), FASB (as an independent, private sector organization charged with developing accounting standards to enhance transparency) and other agencies such as the banking agencies (charged with prudential supervision and oversight of safety and soundness of financial institutions. See, e.g. the Dec. 8 speech of SEC Chairman Christopher Cox, (see related article by Tim Reason of CFO.com, "Cox: Accounting is Not a Fiscal Policy Tool,") as well as the Nov. 21 speech of SEC Corp Fin Director John White (speech aptly named: “Don’t Throw the Baby Out With the Bathwater”), and in the above-cited Dec. 8 speech by FASB Chairman Robert Herz.

Herz noted in his remarks at the AICPA conference, “[T]o what extent are there contradictory objectives, for example, between safety and soundness vs. investor protection built into our current regulatory architecture.?” He cited similar views of forrmer SEC Chairman Arthur Levitt, in which Levitt had said: “banking regulators have one concern, but it is not investor protection.”

“I believe that it is imperative that this point be borne in mind in any redesign of our regulatory system so that the interests of investors and consumers don’t get shoved aside in favor of other public policy goals,” said Herz. He added, “In that regard, it is critical that accounting standard setting remains independent and oriented toward establishing standards that promote useful and transparent financial information for investors and other users and not be geared to fulfilling other objectives, as some have suggested.”

An example of the intersection of accounting standards and public policy can be seen in the Dec. 3 joint comment letter of the federal banking agencies to FASB on the upcoming changes to FAS 140 and FIN 46R which will impact securitization accounting and transfers of assets. The proposed elimination of the exception for ‘Q’s’ (qualified special purpose entities) has been estimated by some to potentially add billions and possibly trillions of dollars of mortgage-backed and certain other assets back on the balance sheets of financial institutions and other transferees, raising capital adequacy and other concerns.

The banking agencies advise FASB in their letter to work with the IASB on a long term solution, to: “provide financial statement users with a stable and reliable source of information about asset transfers including securitizations.” They add: “We recognize the need for improved transparency of financial reporting for securitization transactions and other off-balance sheet activities. We also understand the desire of the [SEC] and the FASB to provide a short-term fix for the accounting in this complex area in response to the financial turmoil observed since mid-2007.” However, they note, “we are concerned that making short-term changes to the U.S. accounting standards for financial asset transfers and consolidation could have an impact on credit markets in the U.S.”

More Guidance on Fair Value or Impairment Coming by Year-End?We previously cited the comment letter of the American Bankers Association to U.S. Treasury Secretary Henry Paulson asking that the SEC take immediate action to provide certain guidance on fair value in time for year-end reporting. We also previously we cited the joint comment letter field by FEI’s Committee on Corporate Reporting and the U.S. Chamber of Commerce asking FASB to further defer the effective date of FAS 157, Fair Value Measurement, with respect to nonfinancial assets and liabilities, and to reexamine FAS 157 in its entirety.

In his remarks at the AICPA conference earlier this week, SEC Chairman Christopher Cox noted that preliminary findings in SEC’s Congressionally mandated study of mark to market (fair value) accounting are that further guidance on impairment and on fair valuing in illiquid markets is needed. He stated that the SEC had made a formal request of FASB in October to provide additional guidance on impairment (e.g. Other than temporary impairment or OTTI under FAS 115). Cox added: “Since our October letter, we have encouraged the FASB to address issues including impairment, the convergence of IFRS and U.S. GAAP on this and related topics, and the treatment of so-called EITF 99-20 securities including CDOs and other structured instruments.” He then noted: “As you will hear from Bob Herz and others later today, the FASB is working diligently on these issues, and is mindful of the importance of providing guidance in time for the preparation of annual reports at the end of this year.”

More Reading On…Further reading on the subject of regulatory reform can be found in the Washington Insights column (this month authored by yours truly) in Financial Executive Magazine, “Congressional Hearings on Financial Regulation on Tap.” (Non-FEI members will be prompted to create a free online login account to read articles from our magazine.)

There are many other thought provoking articles in this month’s Financial Executive Magazine, including the cover story, Fraud’s House of Cards, by former Enron Executive (and founder of The Integrity Institute) Lynn Brewer. There’s also an interview of PCAOB Board Member Charles Niemeier – “Can More… or Less Regulation Fix What’s Wrong,” by Cheryl Graziano, Vice President-Research and Operations of the Financial Executives Research Foundation (FERF) and Ellen Heffes, Editor-in-Chief of the magazine.

You can also read timely updates on international financial reporting issues by Alfred M. King, vice chairman, Marshall & Stevens, and David M. Morris, a member of the International Auditing and Assurance Standards Board’s (IAASB’s) Consultative Advisory Group (CAG) and CEO of MORRIS Consulting. And, don’t miss Managing Editor Marian Raab’s writeup “Treat All Bank Failures Equally, Says Former FDIC Chief,” along with some news about one of my favorite CFO’s, Dunder Mifflin’s David Wallace, in this month’s In Brief column.